1. finance
2. investing
3. funds
4. hedge fund

Proceedings of the International Symposium on Emerging Trends in Social Science Research
(IS15Chennai Symposium) ISBN: 978-1-941505-23-6
Chennai-India, 3-5 April 2015 Paper ID: C533
Institutional Investors and Sustainable Investment Decisions:
A Survey on Indian Financial Sector as against select
European Counterparts
Ria Sinha,
Department of Policy Studies,
TERI University, India.
E-mail: [email protected]
Manipadma Datta
Department of Business Sustainability,
HOD and Professor,
TERI University, India.
E-mail: [email protected]
___________________________________________________________________________
Abstract
Environmental, Social and Governance (ESG) challenges have changed the world of business
investments altogether. Research findings have established to a great extent the validity of the
arguments that the determinants of new investments should not necessarily be confined to the
traditional parameters of financial factors. ESG issues could play a big role in addition to the
known parameters of risk and return relationship. These now remain to stay for the coming
years primarily because of the fact that unless ESG issues are factored into mapping the risk
profile, the investors might be caught on the wrong foot and pay a heavier price. Particularly,
in case of institutional investments, since those are purely custodial in nature, hedging the
position seems extremely crucial. Since the institutional investors are the prime movers in the
market, it becomes imperative to investigate into the depth of ESG acceptance among the
custodial investors. We have attempted to investigate the same in Indian market by collecting
and analyzing the first-hand account given by fund-managers and investment bankers based
in Mumbai, India’s financial capital. To get a comparative scenario, some European
counterparts have also been brought under our survey. This paper attempts to document that
with a critical appraisal of the situation.
___________________________________________________________________________
Key words: Institutional Investors, ESG Investing, Sustainable Investing, Corporate Finance,
Risk-Return approach, Portfolio Diversification.
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1. Introduction
Environmental, Social and Governance (ESG) challenges have changed the world of
business investments altogether. Sustainable investments are increasingly perceived as the
key drivers of sustainable development. Research findings have established to a great extent
the validity of the arguments that the determinants of new investments should not necessarily
be confined to the traditional parameters of financial factors. ESG issues could play a big role
in addition to the known parameters of risk and return relationship. Instead, in other words,
the risk perspectives of new investments have undergone quite a formidable change. A
substantial amount of risk is evidently perceived to come from a new set of factors called
ESG in recent times. And these are now to stay for the coming years primarily because of the
fact that unless ESG issues are factored into mapping the risk profile, the investors might be
caught on the wrong foot and pay a heavier price. Particularly, in case of institutional
investments, since those are purely custodial in nature, hedging the position seems extremely
crucial. It has also been noted in several studies that when well geared hedging is done with
the ESG issues in mind, it tends to offer better results. And the trend is really getting stronger
day by day with the gradual increase in the acknowledgement level of such reality. In India
too, the strategic importance of considering ESG factors has started taking roots with the facts
like introduction of two sets of market indices, S&P ESG in 2008 and BSE Greenex in 2012,
the latter being an active market portfolio too.
However, the BSE Greenex is not wholly ESG based, although it could also be taken as a
good proxy. Since the institutional investors are the prime movers in the market, it becomes
imperative to investigate into the width and breadth of ESG acceptance among the custodial
investors. This paper attempts to do the investigation among a good sample of Mumbai based
fund managers and investment bankers through surveys and personal interviews. To further
cause by having a comparative view with a similar exercise among some German
counterparts, Germany being undoubtedly the foremost nation in the European Union (EU).
At the end, a broad based comparison is attempted with other two EU nations closely
following Germany, Switzerland and Austria, on the basis of some secondary data collected.
In terms of sustainable investments, overall volume of the market size in Germany, Austria
and Switzerland totals 134.5 billion euros, institutional investors being the key drivers to
growth. In these three countries, the volume of investments, where not only financial
indicators but also ESG criteria has been taken into account, has increased by 12% within a
year. Out of the three countries, there has been a strong growth in the area of sustainable
investment funds and mandates in Austria, which has witnessed an increase of 29 % followed
by Switzerland and Germany, each with a growth rate of 17%. Interestingly, in all the three
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Proceedings of the International Symposium on Emerging Trends in Social Science Research
(IS15Chennai Symposium) ISBN: 978-1-941505-23-6
Chennai-India, 3-5 April 2015 Paper ID: C533
countries the market for sustainable investments has grown at a rate higher than average for
the conventional market.
The construct of the paper is as follows: Section 2 deals with the role and importance of
institutional investors i.e. fund managers and investment bankers in India with the major
findings from the surveys undertaken. In Section 3, we have tried to look at the global
scenario i.e. the state of sustainable investments in Germany and the results obtained from the
expert interviews. Section 4 includes the state of ESG investments in Switzerland and Austria.
Section 5 mentions the limitations of the study. Section 6 i.e. the concluding section provides
a brief analysis of the results obtained from the above mentioned sections and discusses the
way forward.
2. Institutional Investors and ESG Investing
2.1 Importance of Fund Managers in ESG/Sustainable Investing
The institutional investors are the key drivers to sustainable investment. Different studies
conducted by Mercer, IFC, World Bank and some of the other research organizations have
highlighted the role of institutional investors specifically mutual funds and hedge funds in
ESG investing. According to several reports, the genesis of ESG investing has started with the
onset of the global financial crisis. The investors, institutional investors in particular have
become quite aware of the risk perspective of the ESG factors. In this context, UN Principles
of Responsible Investment (PRI) is perhaps the only overarching framework which provides
the institutional investors a broad overview of the ESG risk factors in traditional investment
analysis and also sets the platform to adequately address the ESG risk factors through its 6
major principles. The fact that the number of signatories to UNPRI including investment
managers, asset managers and other professional partners has seen a significant increase since
the inception of the principles is an indicator towards the acceptance of ESG factors in
portfolio analysis.
The risk taking capacity of the institutional investors is lesser than other investors keeping
in mind that they are custodial and fiduciary in nature. Apart from this, majority of
institutional investors are interested in long term returns and enhancement of shareholder
value. Hence they are aware of the fact that a company which well manages both its ESG
performance in concurrence with the financial indicators, are companies which can sustain
over the longer run. In fact, the individual companies have also understood this fact and the
trend is quite evident in the west. ESG investing is the provenance of institutional investors
wherein they consider ESG factors to illustrate quality management. Globally, it is their
commitment in the long run. While we try to emphasize the role of institutional investors in
ESG investment, research also indicates the several approaches which they undertake in
integration of ESG factors in their portfolios.
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Proceedings of the International Symposium on Emerging Trends in Social Science Research
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a. Full ESG integration in portfolios
According to this approach, investors consider only positive ESG stocks while minimizing
their negative exposure. Hence this approach includes companies which have positive ESG
ratings.
b. Screening Approach
This approach is quite similar to the first approach wherein investors use issue-based screens
while selecting stocks for their portfolios.
c. ESG branded investment approach
According to this investment approach, investors dedicate only a portion of their AuM to ESG
investments.
d. Governance or active ownership approach
Investors take an active approach by engaging with their portfolio companies that are subject
to ESG risks.
As a matter of fact, ESG factors are now not seen as merely reputational or brand
enhancing factors but ignoring ESG factors can be considered as a breach of the investors’
fiduciary duty. Thus some ESG research organizations are trying to quantify the ESG risk and
estimate a ‘sustainability alpha’. Although this is still in the nascent phases, there is lack of
sufficient approaches to evaluate the risks and opportunities.
Some surveys have been conducted in the developed markets relating to the role of
institutional investors in ESG/Sustainable investments. The findings of the study carried out
by Ernst & Young are as follows:
a. There is no universal framework relating evaluation of non-financial disclosures.
Institutional investors find this as a key barrier to quantify the data.
b. Materiality of the ESG factors was accepted by a large majority of institutional investors.
The ones who did not accept it found ESG factors as non-material.
c. Majority of the institutional investors used non-financial performance as a good
benchmark for risk.
d. Investors had revealed that companies disclosed their non-financial performance in order
to build up a better corporate reputation.
e. The survey also highlighted that the findings varied across geographical regions.
As has been previously mentioned, a survey was carried out with mutual fund and private
equity managers in Mumbai, India, to gauge their level of awareness and perception about the
specific ‘E’, ‘S’ and ‘G’ factors and the extent to which they incorporate them in their
investment decisions (Sinha and Datta, 2014). The following sections elaborate on this.
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2.1.1 Methodology of the survey conducted
This survey was conducted among institutional investors in Mumbai, India, with the help of a
structured questionnaire, which was distributed to them and consisted of their responses to
incorporation of ESG factors apart from the financial factors undertaken in investment
decisions. The structure of the questionnaire was divided into three parts: Section A
consisting of the multiple choice questions with multiple responses, Section B is based of
questions on a Likert scale of 1 to 7 to understand the perception of ESG factors among fund
managers. The reliability of this section has been checked with the coefficient of Cronbach’s
alpha. The last section i.e. Section C comprises of questions. The responses have been
analyzed with appropriate software and have also been cross-checked by interacting with
other members and viewing their reports and factsheets. The sample consists of 16 AMC’s
involving 22 fund managers chosen from the Association of Mutual Funds in India (AMFI),
based on a simple random sampling method. The sample has been again sub-divided into 18
MF managers and 4 PE Firms.
2.1.2 Major findings from the survey of Mutual fund and Private Equity Managers in Mumbai,
India
i. The spread of the AMC’s surveyed is illustrated in the table below.
Figure 1: Spread of AMC’s surveyed
ii. The structure of mutual funds surveyed is highlighted as under:
Table 1: The Mutual Fund structure classification
Type of Funds
Debt
Equity
Hybrid
Index
Other
Total
% of Responses
28
39
17
5
11
100
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Proceedings of the International Symposium on Emerging Trends in Social Science Research
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iii. Most of the mutual fund managers surveyed considers financial factors like returns,
benchmarks, HSES, promoter track records, innovation primarily for their investment
decisions, although some of them also take into consideration some of the ESG factors
as shown below. Most of the MF managers are concerned with corporate governance
factors. As we find from table 2, the extent of environmental factors considered by MF
managers is greater than PE managers.
Table 2: Factors Considered By Asset Managers In Investment Decisions
% of Responses
MF Managers
PE Managers
Risk Profile of the Company
26.9
20
Capital Gains generated
16.4
26.7
Companies which take measures to reduce carbon footprint
10.4
6.7
Energy Efficient Companies
9
6.7
Companies with high retention rate of employees
14.9
13.3
Companies with least legal disputes
19.4
13.3
Other
3
13.3
Total
100
100
Indicators
iv. In case of portfolio diversification, MF managers often take into consideration ESG
factors apart from the other financial factors as has been represented in the following
table below. In this case also the MF managers are much more aware of the
environmental and social factors vis-à-vis the PE managers.
Table 3: Factors Considered By Asset Managers in Portfolio Diversification
% of Responses
MF Managers
PE Managers
Stability in Returns of the Stock
21.2
40
Low risk and moderate returns of the stock
15.4
20
High risk and high returns of the stock
9.6
0
Stocks of companies providing disclosure to financial and 26.9
20
operational information
Stocks of companies which has a high community impact
11.5
0
Stocks of companies with lower GHG emission
5.8
0
Other
9.6
20
Total
100
100
Indicators
v.
Asset managers are increasingly considering ESG factors for screening of their portfolios,
with greater emphasis on corporate governance factors. However, the MF managers also
take into consideration the environmental factors as compared to the PE managers. The
following table is indicative of the same.
Table 4: Factors considered by Asset managers in screening Portfolios
% of Responses
MF Managers
PE Managers
Listed on a Stock Exchange
17
0
Effective Management
29.8
50
Profits and Dividends
29.8
33.3
Stocks of Companies following proper environmental norms 17
16.7
Other
6.4
0
Total
100
100
Indicators
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vi.
In terms of research related activities of companies, fund managers consider investing in
companies with research conducted in the domain of corporate governance. The mutual
fund managers comply much more with the CSR guidelines than the PE managers. Apart
from this, the MF managers also consider factors such as disclosure and reporting,
innovation of equipments to reduce GHG emissions, developing company valuation
models and also consider companies which take adequate measure in the sphere of water
management.
vii.
Although the fund managers are becoming aware of ESG factors in their investment
decisions, rarely few of them have international partnership with sustainable framework.
Only three of the asset managing firms namely, HSBC, SBI and Multiples PE consider
partnerships with UNPRI, Auto Euro III Emission norms and Equator principles
respectively.
viii.
MF and PE managers mostly report financial and corporate governance factors to their
clients.
ix.
Most of the MF firms surveyed publish annual and financial reports, although some like
L&T are also publishing sustainability and disclosure reports.
x.
While trying to identify newer opportunities for investments, MF managers are highly
concentrating on companies having good corporate governance. On the other hand, PE
managers surveyed only consider financial factors for newer investments. But compared
to the PE managers, the MF managers also take into consideration corporate governance
factors like companies with better CSR approach; enforce environmental factors like
companies with better energy efficient practices; and social factors like companies with
high labour intensity of business.
xi.
Regarding mode of applying pressure on individual companies to improve their ESG
performance, most of fund managers do not apply pressure. In case they apply, the
general mode is private meetings between fund managers and company directors. On the
other hand, PE managers surveyed usually conduct only private meetings between fund
managers and company directors.
xii.
According to the MF and PE managers surveyed, majority of their clients do not place
importance to include ESG criteria in their portfolios. Clients are mostly interested in the
performance of their portfolios and hence enforce only financial returns on the same.
xiii.
Most of the MF managers and PE managers do not have an adequate ESG management
system at present, but are quite hopeful about having a rigorous ESG mechanism in the
future. Given the fact that the risk taking capacities of these two asset classes are
different, most of the asset managers are assertive that investment tools such as company
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valuation models need to be developed further to adequately capture ESG data. In fact,
according to some MF managers, one needs to see whether that would lead to
strengthening the business model of the company. In this context, it is also pertinent to
mention that none of the asset management companies has calculated its sustainable
“assets under management” (AuM).
As some of the questions were perception based, Likert scores were also calculated to get
an approximate idea of the fund managers who believe that factoring of Environment,
Social and Governance factors into investment decisions can add value to their portfolios.
Figure 2: Perception of Fund Managers about ESG factors in investment decisions

3
6 0.0 0

9


5 0.0 0
likert_score
xiv.





4
2

1
15
13

1


14
5

1
10

1
2
3
4
5
6
5
6

2 0.0 0

1 67
1 28

4 0.0 0
3 0.0 0

11

8

7
7
8
5
9 10 11 12 13 14 15 16 17 18 19 20 21 22
Case
2.2 Investment Bankers and ESG Investing
2.2.1 Importance of Investment Bankers in ESG/Sustainable Investing
The role of the investment banking firms in ESG investing has been steadily increasing in
the last few years. Apart from their conventional role of assisting individuals, corporations
and governments in raising capital by underwriting or acting as the clients’ agent in the issue
of securities, investment bankers are also taking an active role in ESG/sustainable
investments. Although there has been adequate number of studies pertaining to the role of
fund managers in ESG investing, there is limited literature as to how investment banks can
accentuate this process. As we all know that the two main lines of business of investment
banking, i.e. the buy side and the sell side. The role of investment banking in sustainable
investing is primarily concerned with the buy side. This involves the provision of advice to
institutions concerned with buying of investment services. As a matter of fact, investment
bankers can play a very crucial role in advising their clients during mergers and acquisitions.
Apart from this, they can also offer sustainable investment products or strategies. Investment
bankers can play a positive role in assisting their clients with their investment portfolios,
which can include specific ESG factors. Project financing is also an area wherein investment
bankers can finance for green sustainable projects which emphasizes on inclusion of
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sustainable factors along with the profitability of the projects. Although the role of investment
bankers in sustainable investing have not been sufficiently explored in literature, they can
themselves put in place a tangible ESG framework which can be embedded in their
mainstream investment assessment. Investment bankers can also consider international
partnerships with sustainable frameworks like UNEP FI, UNPRI, 2 degree Investing
Initiative, Carbon Disclosure Project, and Climate Principles etc. To understand the
significance and position of Indian investment bankers in ESG investing, a survey was carried
out in Mumbai, India. The methodology and findings of the survey are illustrated in the
forthcoming sections.
2.2.2 Methodology of the survey conducted
The sample of investment bankers in India was chosen from AIBI i.e. Association of
Investment Bankers in India. Detailed questionnaire was sent to all the Chief Financial
Officer’s (CFO) and/or Chief Investment Officer’s (CIO) listed in AIBI for their responses.
Telephonic interviews were conducted with 12 key persons who had shown their interest. The
structure of the questionnaire is as follows: Section A consisted of multiple choice questions
with multiple responses and descriptive questions. Some of the descriptive questions were
asked simultaneously with the multiples choice questions to get their spontaneous responses.
Section B consisted of perception based questions on a Likert scale of 1 to 5 to understand
their perception of ESG factors towards sustainable investing. The responses have been
analyzed with appropriate software and have also been cross-checked by interacting with
other members and viewing their reports and factsheets. The structure of the Investment
banking category is illustrated as follows.
Figure 3: Structure of Investment Banking Category
2.2.3 Major findings from the Interviews
i.
The classification of key activities of the investment bankers is the following:
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Key Activities
Table 5: Classification of Key Activities
% of Responses
Mergers and acquisition advisory
Private placement of securities
Private equity advisory
Public offering/underwriting of securities
Merchant banking
Trading of securities
Financial restructuring advising
Securities finance
Prime brokerage
Trading and creation of derivative instruments
Any other
Total
21.6
16.2
16.2
10.8
10.8
5.4
2.7
2.7
2.7
2.7
8.1
100
ii. The classification of assets of clients managed by the Investment Bankers surveyed is
highlighted as under:
Figure 4: Classification of assets managed by the Investment Bankers
iii. The investment bankers surveyed mostly provide their advisory services in Private Equity
and Merger & Acquisitions.
Table 6: Advisory services provided by Investment Bankers
Advisory Services
% of Responses
PE Advisory
20.8%
M&A Advisory
20.8%
Infrastructure Advisory
15.1%
Project Advisory
15.1%
Real Estate Advisory
15.1%
Finance Restructuring Advisory
11.3%
Any other
1.9%
Total
100
iv. 88.2 % of the investment bankers surveyed mostly take into consideration the stability in
returns of the stock, while they assist their clients with their investment portfolios. 11.8%
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of the respondents take into account corporate governance factors like reputation and
history of the promoter, NOC’s from the CPCB and certain other green documents.
v. In accessing the potentiality and profitability of projects while financing, 46.2% of the
investment bankers take into consideration financial benchmarks, 23.1% of the
respondents consider environmental factors, 15.4% consider macroeconomic factors,
11.5% account corporate governance factors and 3.8% of the investment bankers
surveyed take into account social factors.
vi. 42.9% of the investment bankers surveyed report financial factors to their clients, 32.1%
report corporate governance factors, 10.7% of the investors report environmental factors
and social factors each.
vii. 75% of the institutional investors surveyed do not consciously counsel clients to include
ESG criteria in their portfolio, while the rest 25% does so.
viii. 64.3% of the institutional investors surveyed do not have any partnership with
international framework such as the Equator principles, Climate principles, UNPRI or
UNEP FI. 14.3% of the respondents have partnerships with the Equator Principles. 7.1%
of the respondents have partnerships with the Climate principles and Carbon Disclosure
Project. The remaining 7.1 % consider international partnership with other frameworks
such as Carbon credit assessors.
ix. All the investment bankers surveyed revealed that they do not encourage their clients to
become signatories of the above mentioned sustainable frameworks while taking
investment decisions.
x. The key success factors considered by investment bankers in Mergers & Acquisitions are
illustrated below:
Table 7: Key factors considered by investment bankers in Mergers & Acquisitions
Success Factors for M&A
% of Responses
Synergies btw acquirer and acquire
22.2%
Intent of acquisition, post integration setup and positioning
19.4%
Perceived long term benefits
11.1%
Financial factors are mostly considered
11.1%
Environmental clearances
11.1%
Only Financial factors
5.6%
Match of vision and long term plans
5.6%
Due diligence and compliance with regulator
5.6%
CG factors
5.6%
HR factors
2.8%
Total
100
xi. The following pertinent factors are considered by the asset/wealth management division
of the investment banking firms surveyed.
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Figure 5: Factors considered by the Asset/Wealth management division
xii. According to the investment bankers surveyed, the following are the non-financial factors
considered while designing/customizing a portfolio of investment for their clients.
Figure 6: Non-financial factors considered while designing/customizing an investment portfolio
xiii. 55.6% of the investment bankers surveyed do not have any tangible framework which
can be embedded in their mainstream assessment. 22.2% of the respondents have a
checklist of ESG factors, 11.1% adhere to environmental and social due diligence,
while another 11.1% have performance standards framework for evaluation.
xiv.
The following figure illustrates the respondents’ position of ESG factors in the
emerging research issues.
Figure 7: Position of ESG factors in the emerging research issues
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xiv.
below.
The reports published by the investment bankers surveyed are illustrated
Figure 8: Reports published
xv.
41.7% of the investment bankers agreed to the fact that there can be a model for
considering ESG factors. However, 25% of the investors ‘did not agree’ and for
33.3% of the institutional investors it was ‘difficult to say’.
xvi.
66.7% of the investors believed that there can be a realistic framework for the
inclusive valuation of ESG factors in investment portfolio. However, the rest 33.3%
found it difficult to comment upon.
xvii.
The following are the key motivational factors to sustainable investing as believed by
investment factors surveyed.
Table 8: Key motivational factors to sustainable investing
Key motivations for sustainable investing
% of Responses
Value addition to clients
25.8
Generation of long term returns
25.8
Reputational Concerns
19.4
Inclusive growth and long term sustainability
12.9
Good to do (philanthropy)
12.9
Aspiration of companies to work with foreign investors
3.2
Total
100
xviii.
The following are the key demerits of the concept of sustainable investing as believed
by investment factors surveyed.
Table 9: Demerits to the concept of sustainable investing
Demerits of sustainable investing
% of Responses
No objective assessment of the same which is measurable
Returns are low keeping in mind the cost involved
ESG framework is not defined
Red Tapism
Absence of a market to accept ESG factors
Institutional investors are doubtful about profitability in
future
Uncertainty about the regulatory framework
Total
4.2
20.8
4.2
4.2
16.7
29.2
20.8
100
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xix.
The Likert scores calculated for the investment bankers are illustrated in the figure
below. The reliability of the perception based questions has been tested with the
efficient of Cronbach’s alpha.
Figure 9: Perception of Investment Bankers towards ESG investments
Note: 1.00=RBS, 2.00=SMC Capital, 3.00=Axis Capital, 4.00=Almondz Global Securities,
5.00=Centrum Capital, 6.00=Motilal Oswal, 7.00=ICICI Securities, 8.00=Global Trust, 9.00=IDBI
Capital, 10.00=Fortune Financial Services, 11.00=Daiwa Capital, 12.00=IDFC
3. Sustainable Investment scenario in Germany
Germany is one of the foremost nations in the European Union in terms of sustainability
investing and sustainable development as a whole. The rate of increase of ESG investments in
Germany is manifested by the growth of UNPRI members in all the three categories, namely,
Asset Owners, Investment Managers and Professional Service Partners. The German Global
Compact Network (DGCN) is quite similar in nature to the UN Global Compact Network and
brings together the German Global Compact participants from business, government and civil
society committed to implementing and disseminating the 10 principles of the Global
Compact and the goals of the United Nations, not only in Germany but worldwide. As a
matter of fact, DGCN maintains its close association and cooperation with the UNPRI. The
total number of sustainable mutual funds in Germany is on the rise. According to data from
Sustainable Business Institute (SBI), total of 384 sustainable mutual funds were licensed for
marketing in Germany, Austria and Switzerland. Forum for Sustainable Investment (FNG)
estimated the size of sustainable investments in Germany, Switzerland and Austria, to the
tune of 103.5 billion euros, as of Dec 2011. The total figure included mutual funds and
mandates, sustainability oriented specialists’ bank account, customer investments and
sustainable certificates. FNG had also calculated the asset overlays in the German speaking
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countries to the tune of 1055.6 billion euros. Out of this figure, Germany accounted for the
highest share of 618.2 billion euros. According to a Deutsche Bank report, sustainable assets
equivalent to Euro 400 million is managed by them in individual portfolios, mutual funds and
especially themed funds for clients in Germany. In the domain of corporate responsibility,
Oekom Research states that sustainability is a major criterion for German companies to
operate as they are extremely futuristic in believing that sustainable investments can lead to
sustainable development in the longer run (Oekom Research, 2012). The institutional
investors in Germany are extremely focused and determined in factoring ESG criteria in their
investment decisions. In fact, this was one of the key results of the survey conducted by
Union Investment. Moreover, a growing number of institutional investors expect
sustainability reporting requirement to increase rapidly and hence they can no longer ignore
the pertinent issue of sustainability. Sustainable investing in Germany is much beyond
reputational concerns. It has become more of a risk management criterion. The essence of
sustainable investing in Germany lies in the hands of the institutional investors who believe
that a top-down approach is to be followed in its implementation process in investment
decisions. It is a matter of fact that the narrow differences between ESG investing, sustainable
investing and SRI investing is ignored by majority of investors and are mostly seen as
synonymous terms. The most common approaches followed in sustainable investing are Best
in class approach, Engagement and voting, Exclusions, Impact investment, Integration,
Norms based screening and sustainable themes. According to Social Investment Research
Platform (SIRP), the German government has certain regulations in relation to the fiduciary
duty of institutional investors towards ESG investing. The investors have a legal duty to
manage investments professionally to ensure highest possible security and sustainable profit,
apart from risk diversification and liquidity requirements.
Eurosif conducts socially responsible investment (SRI) surveys in Europe every year
with institutional and retail investors. The results from the 2014 survey are more or less
consistent with the findings of the 2013 survey. The data has been gathered from 13 distinct
European markets. Although the survey has covered a broad range of European countries, we
present the major findings in the German market. The study calculates CAGR from 2011 to
2013.
The main findings of the study are as follows:
a. The foremost and overall finding from the survey is that the sustainable and responsible
investment strategies in the selected markets including Germany continue to grow at a
faster rate than the broader European market.
b. Germany has seen a negative growth of -4% in sustainability themed funds, which cover
a wide range of themes from climate change and energy efficiency to forests and water.
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c. Germany has indicated a positive growth of 10% in Best-in-class investments, which
involve selecting the top percentage of companies within a sector using ESG criteria.
d. Norms based screening in Germany has seen a negative growth of -5%. This strategy
involves assessing each company held in the investment portfolio against the specific
standards of Environmental, Social and Governance criteria.
e. Using the Exclusion based criteria; Germany has indicated a 20% growth. This strategy
also known as negative screening involves removing certain companies from the portfolio
based on certain Environment, Social and Governance indicators.
f.
ESG integration has seen a slight decline of -2% in Germany. ESG integration actually
refers to explicit inclusion by asset managers by factoring ESG risks and opportunities
into traditional financial analysis and investment decisions.
g. Engagement and voting has increased by 22% over the mentioned time period.
h. Best in Class and Exclusions are the most popular strategies used by institutional
investors in Germany.
i.
The report also states that asset managers in Germany take an optimistic view on the
future. They expect the market to further grow and believe that institutional investors will
continue to be the most important drivers of SRI demand in the German market.
Novethic in association with FNG had conducted a market survey with 185 asset owners
from 13 countries with 6 trillion euros in assets from June to September, 2014. Out of the
total sample of respondents, 20 respondents are from Germany with 1204 billion euros worth
assets (Novethic, 2014). The major findings from the survey on German investors are as
follows:
a. German signatories to UNPRI are increasing, as compared to the other European
counterparts. According to the study, while 12% of the respondents were signatories in
2013, the number increased to 50% in 2014.
b. 80% of the German investors have introduced an ESG strategy. Four out of the five
respondents use sector based exclusions and 65% exclude companies implicated in
violations of international norms.
c. According to the survey, Germany is still underdeveloped in terms of shareholder
engagement. Only 35% of the sample surveyed stated that they had only one direct
dialogue with companies in the period considered which mainly focused on governance
issues.
In this context, it is highly pertinent to mention about the German Sustainability Code
(GSC). The German Council for Sustainable Development attaches great political value to the
GSC. Some of the salient goals of the GSC are as follows:
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a. Creating a level playing field for sustainability by means of standardized minimum
requirements, a frame of reference for making competitive comparisons
b. Mainstreaming sustainability, tapping into new groups of investors for enterprises
c. Facilitating access to sustainability data
d. The application of GSC is voluntary, the set of criteria and the Key Performance
Indicators (KPI) is binding
e. The Council assumes no liability for the quality of the information
The Council also demarcates the area of application of the GSC. It is valid for all sizes,
organizational and legal forms. As a matter of fact, the Code specifies the KPI’s (both by GRI
and EFFAS). The Code assures that this binding set of criteria and the KPI’s are expected to
achieve better comparability between companies, industries and countries. Companies can
decide whether to report on the basis of the KPIs of the GRI or EFFAS. The KPI’s cover a
broad range of strategic areas like Strategy, Process management, Environment and Society.
The University of Hamburg, Germany, had conducted a survey on the analysis of
implementation and effectivity of the GSC. The survey was carried out with 163 participants.
The responses received involved asset managers (32%), Sell side analyst (10%), Buy side
analyst (7%), Asset Owners (1%), Rating agency analyst (1%), others (18%) and no
responses (31%). Some of the major findings of the survey are stated as under:
a. Only 24% of the respondents were aware of the GSC. 41% of the respondents did not
respond.
b. 8% of the companies had examined the introduction of GSC with the majority of
respondents not responding to it.
c. 3% of the companies surveyed had actually implemented GSC across all company levels
and 2% of the companies implemented GSC at the asset management levels.
d. 23% of the companies surveyed consider improved reporting standards on non-financial
information as necessary.
e. To the question as to why they consider improved reporting standards as necessary on
non-financial information, the responses hovered around transparency, improved risk
assessment, customer requirements, demand from some investors, lack of uniform
guidelines and comparability, to increase reliability and level of detail of company
evaluation etc.
f.
GSC is mostly used by companies as a good management signal of companies, as a
selection criteria for individual titles, enhancement and debasement in evaluation,
quantification in evaluation models etc.
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g. The main advantages of the GSC include increased transparency, addressing the issue of
sustainability in general, reflects social pressure, strengthening sustainability within the
company, internationally compatible, suitability for all company sizes etc.
h. Some of the main disadvantages of the GSC as reported by the responding companies
include non-representation of sector specific characteristics, unclear interpretation of
sustainability by GSC, low level of international compatibility/adaptability, applicability
of GSC to only large enterprises, low number of declarations of conformity, absence of a
legal framework etc.
i.
The most common KPI indicators as was found from the survey are ESG assessment,
research for ESG fields, remuneration and performance, ESG business strategy,
Greenhouse Gas Emissions, direct energy consumption, Fines/non-financial penalties etc.
3.1 Methodology of the Personal Interviews conducted
The sample of ESG experts in Germany was chosen through a purposive sampling
method among academicians, NGO’s and ESG rating agencies in Berlin, Frankfurt and
Hamburg. The sample size is small, comprising of 10 experts in the domain of sustainable
investments who directly interact with institutional investors. The survey was conducted with
the help of an interview schedule wholly based on descriptive questions. The responses have
been analysed using appropriate software. The structure of the respondents is illustrated
below.
Figure 10: Classification of Experts
3.2 Major findings from the primary survey
i.
To the question of whether they believe that there has been an attitudinal or perceptional
change towards ESG investing in the recent years, all the 10 experts have agreed to it.
According to the experts, the financial economic crisis has been the primary reason
wherein institutional investors have understood the importance of good governance and
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other Environment and Social risk factors. Some experts also believe that strengthening
of the regulatory framework has also geared up the process of sustainable investing.
There has also been a remarkable increase in the number of green and ethical banks in the
country.
ii.
When asked about the importance of the UNPRI, 55.6% of the respondents stated that this
flagship initiative is indeed ‘important’. 44.4% of the respondents believed that the
principles were ‘extremely important’. According to all the respondents, the principles are
very much meaningful for mainstream investors and set the platform for responsible
investments. It also enhances the confidence of the future financial managers in
sustainable investing. Apart from this, the experts also believed that the UNPRI’s gives a
possible menu of actions for factoring the E, S and G factors in financial portfolios.
Although the importance of the UNPRI’s has been accepted by all the experts, there exist
certain lacunae in its framework and proper implementation.
iii.
To the question of whether they believed that PRI’s offer a possible menu of actions for
incorporating E, S and G factors in investment practices across asset classes, 66.7 % said
‘yes’, 22.2 % said ‘no’ and 11.1 % of the respondents were ‘not sure’ about it.
iv.
33.3% of the respondents believed that the Key Performance Indicators (KPI’s) were the
most important framework for considering the specific Environment, Social and
Governance factors in investment portfolios. The KPI’s are included in the German
Sustainability Code (GSC) which was established by the German Council for Sustainable
Development in 2001. There are 19 KPI’s for ESG in the broad arenas of Strategy,
Process Management, Environment, and Society. The other 66.7% of the respondents,
which includes mostly the ESG rating agencies have their own specific indicators which
are sector specific and are maintained confidentially.
v.
Apart from this, all the respondents believed that the E, S and G factors were
complimentary to each other but are industry specific.
vi.
The key approaches to ESG integration as practiced are illustrated below:
Figure 11: Main approaches to ESG integration
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vii.
All the professionals interviewed believed that financial organizations should have an
effective ESG management system, so that they can understand the risks and
opportunities underlying sustainable investments.
viii.
Regarding the requirement of a separate ESG research department for research on
sustainable investments, 55.6% replied ‘yes’, 11.1% said ‘no’, 22.2% were ‘not sure’ and
11.1% were ‘neutral’.
ix.
The main motivations for sustainable investing in the German financial sector is
illustrated in the table below:
Table 10: Motivational factors to sustainable investing in the German Financial sector
% of
Factors
Responses
Secured investment independent from crisis
18.2
Add to profits in the long term
27.3
Diversification of risks
22.7
Contribute to the movement of sustainability and sustainable development
9.1
Reputation and public perception
13.6
Institutional investors are becoming more concerned and committed
4.5
Growing market size of sustainable investments
4.5
Total
100
x.
The perceived barriers to sustainable investing according to the experts are provided in
the table below.
Table 11: Perceived barriers to sustainable investing
Factors
% of
Responses
Lack methods to evaluate ESG risks in portfolios
17.2%
Lack of enforcement from industries and suppliers
10.3%
Lack of ESG awareness among institutional investors
17.2%
Assumption of negative returns from ESG investments by institutional investors
3.4%
Difficult to integrate non-financial factors in valuation models
13.8%
Insufficient studies to prove the positive correlation btw financial performance
and ESG factors
13.8%
Lack of a proper framework to integrate ESG factors
17.2%
Cost is a big factor considering the returns
6.9%
Total
100
4. Sustainable Investment market in Switzerland and Austria
4.1. Sustainable Investment scenario in Switzerland
The sustainable investment market in Switzerland has substantially grown over the last
five years. According to a report by FNG, the volume of sustainable investment market rose
to CHF 56.7 billion in 2013 with a growth rate of 17% over the previous year. The salient
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contributors to this were investment funds, mandates and structured products. The following
figure provides the details and growth of the same.
Figure 12: Investment Funds, Mandates and Structured Products
Source: FNG
The High-net-worth individuals (HNWIs) play a very important role in Switzerland. In
fact, sustainable investments are increasingly becoming an attractive proposition for HNWIs.
The basic motive behind sustainable investments for HNWIs is reputational factors. The
strategies used by them include norms-based screening, exclusion criteria and best-in-class
approach. The following figure provides the sustainable investment approaches used by the
institutional investors in Switzerland.
Figure 13: Sustainable Investment Approaches
Source: FNG
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The typology of SRI investors in Switzerland is represented in the figure below:
Figure 14: Typology of SRI investors in Switzerland
Source: FNG
The legal and regulatory framework for responsible investments in Switzerland is
evolving in a strong manner. “Guidelines for institutional investors governing the exercise of
shareholder rights in Swiss listed companies”, a collaborative effort by the institutional
investors, proxy advisors and business representatives has been in place. It is meant to
facilitate a voluntary agreement concerning the industry’s commitment to the exercise of
voting rights. Apart from this, “Klimarappen/Centime Climatique”, an industry initiative to
reduce CO2-emissions, or the steering tax on CO2 emissions from fossil fuels, has also been
framed. In addition to that, Switzerland has ratified the International Convention on Cluster
Munitions (CCM). The corresponding legislation includes the ban of financing such weapons
through direct or indirect investments, whereas the latter are prohibited if they are meant to
evade direct investments.
According to a survey by RobecoSam in 2014, the Pension funds in Switzerland are also
increasingly factoring the sustainability aka ESG factors in their portfolio. The survey took
place across 1200 pension fund members from each of Switzerland’s diverse language
regions. The findings of the survey are as follows:
a. Pension fund members in Switzerland are interested in how and where the pension fund
invests their money.
b. The overwhelming majority (72%) of the insured members are calling for more
sustainable investment strategies from their pension funds.
c. 79% of the pension fund members believe that sustainable investment strategies lead to
better long-term investment decisions.
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4.2 Sustainable Investment market in Austria
Austria has also taken a strong stand when it comes to sustainable investments. The
economy has witnessed a robust growth in the area of sustainable investment funds and
mandates. Compared to Germany and Switzerland in the European continent, Austria is
leading the way with a 4.5 % share of the sustainable segment. Both in Austria and
Switzerland, corporate pension funds are the most frequent investors in sustainable
investment solutions. The salient contributors to this were investment funds, mandates and
structured products. The following figure provides the details and growth of the same.
Figure 15: Investment Funds, Mandates and Structured Products
Source: FNG
The most prevalent sustainable investment approach followed in Austria is negative
screening or exclusions. Apart from this, the other approaches followed are Norms based
screening, Best-in-Class, Integration, Engagement and the like. The figure below illustrates
the same.
Figure 16: Sustainable Investment Approaches
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The majority of SRI investors in Austria comprises of Public Authorities and
Governments. The classification of SRI investors is illustrated below.
Figure 17: Classification of SRI investors in Austria
Source: FNG
The key drivers for demand in sustainable investments in Austria include demand from
institutional investors, external pressure from NGO’s, media and trade unions, legislations,
international initiatives, demand from private investors, notion of fiduciary duty and
materiality.
5. Limitations of the Study
The study which is mostly based on primary surveys in the Indian and German financial
sectors is subject to certain limitations. First of all, the sample size of the survey undertaken
in the Indian financial sector is small, comprising of 22 fund managers and 12 investment
bankers. If the sample size is expanded, a much broader picture of the trend in ESG investing
is likely to be observed. Even in the case of the German financial sector, we had to conduct a
purposive sampling with a smaller segment of the academicians, ESG rating agencies and
NGO’s, as the direct access to the institutional investors in Germany is extremely limited.
Even for the case of Switzerland and Austria, we had to depend on the secondary sources of
data. Secondly, in almost all the surveys conducted, we had to mostly depend on the opinions
of the respondents’ as we had limited possibilities to verify their statements apart from the
annual reports and factsheets. Thirdly, in all the select European counterparts not much
distinction is made between the terms ‘ESG investing’, ‘responsible investing’ and ‘SRI
investing’. As a result of this, valuation of sustainable assets becomes difficult as the
individual categories overlap.
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6. Concluding Remarks
In the earlier sections, we have tried to provide a commentary on the sustainable investing
scenario in India vis-à-vis the developed nations like Germany, Austria and Switzerland. It is
evident that the institutional investors in India, especially fund managers and investment
bankers, consider the strategic importance of ESG factors in their portfolio construction with
governance issues already having caught their active attention. Likert scores, as used, have
measured these custodial investors’ perceptions vis-à-vis ESG factors. Although the
evidences are strong in cases of bigger investment firms with smaller counterparts yet to catch
up, this is however no little a fact to be ignored. The leaders in the industry are surely to be
followed in the days to come. These firms would be known as trendsetters for obvious
reasons. We can reasonably expect the ESG factors to be considered by the finance firms in
India in greater scale in near future. As compared to this scenario, German, Swiss and
Austrian firms are much ahead. The sustainable investment market in these developed nations
is quite large and has been quantified in some research reports. Apart from being aware of the
implications of E, S and G factors, there has been adequate quantitative analysis to prove the
positive correlation of these factors and financial performance of companies. Hence, for them,
‘ESG’ is already a hedging tool in their hand. Even the retail and church investors are found
considering ESG issues there. The significant increase in the number of green banks and
ESG rating agencies especially in Germany corroborate the argument. As has been evident,
corporate pension funds are the most prevalent investors in Switzerland and Austria, while in
Germany, religious institutions and charitable organizations account for the major share in
sustainable investments. However, ESG potential to earn extra layer of income is yet to be
fully explored. On the other hand, still miles to go in India. Slow progress may be attributed
to our basic risk aversion mindset. At best our findings suggest that, although a bit slow as
compared to the west, the developments are evidently in the right direction.
References
Dittrich, S., et. al., 2014, Sustainable investments in Switzerland, Forum Nachhaltige
Geldanlagen e.V., 3-9.
Dittrich, S., et. al., 2014, Sustainable Investments in Germany, Austria and Switzerland,
Forum Nachhaltige Geldanlagen e.V., 13-33
Eurosif, 2014, European SRI Study, 36-38 & 61-63.
Novethic, 2014, Profile of Responsible Investors in Europe, 20-21& 23-24.
Oekom Research, 2012, Taking Stock of Sustainability Performance in Corporate
Management and Capital Investment, Oekom Corporate Responsibility Review, 9-15.
RobeccoSAM, 2014, Pension fund members in Switzerland are calling for Sustainable
Investment Strategies, Media release, 1-3.
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Sinha, R., and M. Datta, 2014, Problems and Prospect of Developing a Proper Mechanism for
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